Accounts

Topics: Income statement, Financial statements, Balance sheet Pages: 6 (1928 words) Published: June 18, 2013
Why are accounts important

To begin by why accounts are important, a person should first know what accounts actually mean. Accounts are financial records of an organization that register all financial transactions, and must be kept at its principal office or place of business. The purpose of these records is to enable anyone to appraise the organization's current financial position with reasonable accuracy. Firms present their annual accounts in two main parts: the balance sheet, and the income statement (profit and loss account). The annual accounts of a registered or incorporated firm are required by law to disclose a certain amount of information. And have to be certified by an external auditor that they present a 'true and fair view' of the firm's financial affairs. According to American accounting association, accounting has been defined as, “The process of identifying, measuring, and communicating information to permit judgment and decision by the users.” Yet another definition of American Institute of Certified Public Accountants (AICPA) is that “Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character and interpreting the results thereof. Accounting is very much connected with our personal lives in so far as it is in respect of every business. We all with intent or unknowingly generate accounting ideas in a way when we plan what we will do with money. We need to plan how much money will be spent whilst how much of it will be kept back. Therefore accounts are important for the following reasons:

1. Accounts include setting budgets for future spending, and we all are familiar with this concept - which is universally acceptable, that money must be spent cautiously. The same is true of a business. It is therefore imperative for a business to know about the inflow and out flow of economic resources and their results. Thus, accounting is the very need of a business to provide the information which is useful for sound economic decision making process and owing to the diversification between ownership and management.

2. Being known as “The Language of business”, accounting is the basic need of a business organization to find out where it stands. It is of great essence to provide the basis for planning and budgeting while dealing with measurement of economic activities and communicating financial information to the users for decision making.

3. Accounting is also meant for protecting the properties of business and communicating the results obtained from the financial statements to the intended parties like shareholders, debtors, creditors, and investors while meeting the legal requirements.

4. Accounting data or information is used by a number of people such as government officials, investors and creditors. It is customary and by law compulsory for companies to present an annual report before the public that carries accounting information of the previous year. Such a report is often used as conclusive evidence while calculating the tax liability of a business or a company. Apart from that, creditors extend their credit on the basis of such information.

5. Plan ahead for your business as bookkeeping and accounting will make it easier to forecast your business needs ahead and plan for purchases and other business miscellaneous.

6. Make comparisons on your forecasts with supporting actual monthly figures enabling you to evaluate your business’s financial health.

7. discover your most profitable customers and/or products as well as find ways to increase your profit per customer

8. Receive an early warning in times when you might be straying into cash flow difficulties; thus, alerting you to act decisively to avert a crisis. For example a bank loan or a bank overdraft can be arranged in advance, this will avoid liquidity problems to the business....
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